BB likely to leave rates unchanged: report

Bangladesh Bank (BB) will likely hold off on interest rate cuts in fiscal 2015-16 because of volatile headline inflation and rising core inflation in the economy, London-based BMI Research said in an analysis.

Moreover, the central bank's intervention in the foreign exchange market will continue to exert upside pressure on money supply growth, according to BMI Research, a Fitch Group company.

The growth will likely keep the consumer price index elevated, leading to a continuation in the high inflation levels in non-food market, it said.

However, the BB will continue to support economic growth by employing monetary easing measures, such as the selective easing of interest rates to support productive sectors and supply-side capacity of the economy, BMI said.

The BB's measures will include, for example, export promotion activities and providing low interest loans to green projects.

It will also extend low-cost financing to encourage women entrepreneurship, skill-building and energy expansion.

Most notably, the Export Development Fund has been increased to $2 billion in 2015, from just $100 million in 2006.

Bangladesh Bank has kept its benchmark repo and reverse repo rates on hold at 7.25 percent and 5.25 percent respectively since February 2013.

The country's banking regulator is expected to keep those unchanged, especially as inflation in the country remains elevated at the forecasted average of 6.2 percent in the current fiscal year, BMI said. 

The BB adopted a relatively dovish stance, saying that it will not hesitate to ease its policy rate if inflation, particularly core inflation, embarks upon a sustained downtrend.

It also mentioned that volatile headline inflation and rising core inflation in the country remain key concerns, the BMI noted.

Hence, the central bank will likely remain steadfast in its adoption of selective easing measures, instead of embarking on a rate-cutting cycle, to achieve its economic growth target of 7 percent for the fiscal year, it predicted.

Bangladesh's headline inflation moderated considerably to 6.2 percent year-on-year in October 2015, down from its peak of 8.4 percent in April 2013.

Most of the fall in inflation was attributed to a decline in food prices, which constitute almost 60 percent of the CPI basket, BMI said.

However, the central bank noted that food prices have traditionally been more volatile in nature, so it will likely continue to monitor non-food inflation before embarking on a rate-cutting cycle, even though a decline in CPI provided room for the move.

Also, the BB's active intervention in the foreign exchange market to maintain currency stability will keep supply growth elevated and continue to exert upside pressure on inflation in the country, BMI cautioned.

The BB has been carrying out sterilisation operations to contain the impact of capital inflows and outflows on money supply growth to steer inflation to below its official target of 6.2 percent for the 2015-16 fiscal and to preserve its external competitiveness.

The central bank could keep up sterilisation operations to soak up excess liquidity in the economy.

But the nominal interest rate differential between the US treasury bonds and BB bonds, which is currently around 6 percent, has exerted significant pressure on the BB's profitability, and is unlikely to be sustainable over the long term, the BMI report said.

The BB has been actively intervening in the foreign exchange market by buying up foreign exchange, to defuse appreciatory pressures on the taka and maintain exchange rate stability.

The move in turn is flooding the economy with local currency, BMI said.

Now, to manage money supply growth, the central bank has to conduct sterilisation operations by selling BB bills and bonds, which absorb the excess money supply from the economy.